Need another day to put everything together. In the meantime, below is another interesting article on the The Visible Hand of Uncle Sam.
(emphasis mine) [my comment]
... in a 1992 article, John Crudele quoted someone who maintained strong connections in the Republican Party as stating that the government intervened to support the stock market in 1987, 1989 and 1992:
Norman Bailey, who was a top economist with the government's National Security Council during the first Reagan Administration, says he has confirmed that Washington has given the stock market a helping hand at least once this year.
"People who know about it think it is a very intelligent way to keep the market from a meltdown," Bailey says.
Bailey says he has not only confirmed that the government assisted the market earlier this year, but also in 1987 and 1989.
Now a Washington-based consultant, Bailey says the Wall Street firms may not even know for whom they are buying the futures contracts. He says the explanation given to the brokerage firms is that the buying is for foreign clients, perhaps the central banks of other countries. [Emphasis added.]
It is unclear where the money for such futures purchases came from, although in a 1995 article, John Crudele advanced a plausible explanation. Referring to the U.S. Exchange Stabilization Fund, he wrote, "Sources have told me that in the early 1990s it was secretly used to bail the stock market out of occasional lapses." He further stated one source indicated "that the account used Wall Street firms as intermediaries and that Goldman [Sachs]... was used most often as a go-between." Crudele conceded that he could not confirm the allegations and, not surprisingly, that the Fed denied all of them.
They would issue a similar denial when queried by a U.S. congressman in the fall of 1998. According to an October 1999 report by Marshall Auerback of Veneroso Associates, Representative Ron Paul wrote both the Fed and Treasury, asking:
...has there ever been or does there currently exist a policy by the U.S. Treasury Department or Federal Reserve to intervene in the U.S. equity market through purchases of stocks or S&P; futures, either directly for Treasury Department accounts such as the Exchange Stabilization Fund, for Federal Reserve accounts or by proxy - by having broker dealers purchase S&P500; futures when the stock market is threatening to crash on the understanding that they will be repaid for any subsequent losses through the Fed Open market operations or favored treatment at Treasury auctions? [Emphasis added.]
The report by Veneroso Associates stated that Fed Chairman Alan Greenspan responded:
The Federal Reserve has never intervened in the U.S. equity market in any form, either in the equity market itself or in the futures market, for its own account, for the ESF, or for any other Treasury account. The Federal Reserve has never encouraged broker/dealers to purchase any stocks or stock futures contracts. The Federal Reserve has never had any "understandings" with any firms about compensating them in any manner for possible losses on such purchases. [Emphasis added.]
Marshall Auerback then analyzed the response, suggesting that Greenspan may have dodged the issue:
Apparently, a very direct response to a very direct question, which would appear to settle the issue once and for all. We discussed this response with a former Fed counsel and asked his opinion. He immediately pointed out that the answers given by Chairman Greenspan only referred to actions undertaken by the Federal Reserve, and not by any which may or may not have been taken by the Treasury. This may be proper, given that the very same question was posed to Treasury Secretary Rubin. However, the former Fed counsel did point out that some members of the Fed, notably Mr. Peter Fisher, "wore" both Treasury and NY Federal Reserve hats. Not only is Peter Fisher the number 2 man at the New York Fed under [William McDonough], but he also has two vital roles which are carried out in his function as a member of the U.S. Treasury - namely, the management of the Exchange Stabilization Fund (ESF) and the manager of the foreign custody accounts held at the NY Fed. Chairman Greenspan's foregoing answer, according to the former Fed counsel, could be technically correct. But it does not elaborate on the ambiguous two-fold role played by Peter Fisher of the New York Federal Reserve, nor does it cover his Treasury related responsibilities as the manager of the ESF and custody accounts of foreign central banks held at the NY Fed. So the answer does not conclusively resolve the question of official intervention in the stock market.27 [Emphasis in original.]
A more definitive answer would not be forthcoming from the Treasury. In contrast to Greenspan's prompt response, they apparently took a full year to answer Ron Paul's letter. More importantly, the Treasury never directly addressed whether the department or the Exchange Stabilization Fund had intervened in the stock market. In fact, Veneroso Associates would observe:
A former Fed counsel described this response as "an elaborate non answer to the question," noting that the response speaks only to the role of the Federal Reserve, and not to the Treasury, nor the Exchange Stabilization Fund, nor the management of the foreign custody accounts in the NY Federal Reserve. This, despite the fact that the respondent here is the Treasury, not the Federal Reserve. It is a rambling philosophic response, which contrasts quite markedly with the more direct answer given by the Fed.
Thus, a question that could have been answered conclusively has instead raised even more doubts. [Emphasis in original.]
A statement cited previously may shed some light on the situation. When John Crudele quoted Norman Bailey as confirming government stock market activity in 1987, 1989 and 1992, he also wrote that according to the former National Security Council economist, "the explanation given to the brokerage firms is that the buying is for foreign clients, perhaps the central banks of other countries." Just who might have provided such an explanation? One person who could do it convincingly would be the New York Federal Reserve official in charge of the System Open Market Account. As Auerback notes, this official's responsibilities include "the management of the Exchange Stabilization Fund (ESF) and... the foreign custody accounts held at the NY Fed." Recall Crudele's information "that in the early 1990s [the ESF] was secretly used to bail the stock market out of occasional lapses." A reasonable scenario then unfolds: The person who placed the orders for futures contracts evidently told the firms that the buying was for foreign clients. This would have been believable, given one of the New York Fed official's responsibilities. But such an explanation would have conveniently masked the true buyer, which likely was the Exchange Stabilization Fund.
A Treasury-Fed Split?
The Fed's denial of stock market activity, combined with claims that the Treasury controlled ESF did intervene, is intriguing when considered in the context of two 1995 Federal Open Market Committee transcripts. At the January 31 meeting, St. Louis Federal Reserve President Tom Melzer expressed concern about the Fed's proposed participation with the Treasury in the bailout of Mexico then under discussion. The Clinton administration had decided to use the ESF to fund the rescue when Congress refused to grant an appropriation. Melzer worried:
In effect, one could argue that we would be participating in an effort to subvert that will of the public, if you will. I do not want to be too dramatic in stating that. This could cause a re-evaluation of the institutional structure of the Fed in a very fundamental and broad way.35
To which Greenspan cryptically, yet ominously, responded:
I seriously doubt that, Tom. I am really sensitive to the political system in this society. The dangers politically at this stage and for the foreseeable future are not to the Federal Reserve but to the Treasury. The Treasury, for political reasons, is caught up in a lot of different things. [Emphasis added.]
At the March 28 meeting, FOMC members again expressed hesitation about the Fed's planned participation with the Treasury in the Mexican package. Once more, Greenspan attempted to alleviate any fears, but also noted:
We have to be careful as to precisely how we get ourselves intertwined with the Treasury; that is a very crucial issue. In recent years I think we have widened the gap or increased the wedge between us and the Treasury.... In other words, we have gone to a market relationship and basically to an arms-length approach where feasible in an effort to make certain that we don't inadvertently get caught up in some of the Treasury initiatives that they want us to get involved in. Most of the time we say "no." [Emphasis added.]
These passages obviously suggest that by 1995 the Treasury was engaging in activities that Greenspan deemed politically dangerous and, accordingly, with which he was very reluctant to be associated. It is only logical that these actions had not been disclosed publicly by the time he made these two statements. Had they been public, the Treasury would have already suffered the consequences of the political dangers of which Greenspan spoke.
Greenspan revealed what looks to have been a major split between the central bank and the executive branch of government. He spoke of having "widened the gap" between the Fed and Treasury, taking their relationship to a market-based one. This "arm's-length approach" was likely the Fed's attempt to preserve its credibility if the Treasury's initiatives resulted in a political storm. Whatever Treasury was up to sounds rather questionable, judging by Greenspan's explicit statements about political dangers and also his implied worry that the central bank could "inadvertently get caught up in some of the Treasury initiatives that they want us to get involved in." He seems to have fretted that even the appearance of the Fed's participation in these activities could be politically toxic for a central bank that prides itself on independence. Precaution thus appears to have been the Fed's approach when dealing with the Treasury. Of course, according to Greenspan, the Fed only said no to the Treasury most of the time, indirectly admitting that in at least some instances the central bank participated in the unspecified initiatives.
We do not know what these initiatives were and, indeed, Greenspan's frustrating ambiguity suggests he was cognizant of the fact that his words were being recorded. So we are left to speculate. It's a reasonable assumption that whatever the Treasury was doing was market-related. This likelihood is indicated by the Treasury's apparent attempts to include the Fed in the initiatives. The central bank is not responsible for fiscal policy, so logically its only use to the Treasury would be to execute or participate in some market-related transactions. This is further corroborated by Greenspan's comment that the Fed had moved to a "market relationship" where feasible with the Treasury. That statement suggests that the Fed had to conduct at least some of the initiatives on behalf of the Treasury.
At this point we return to the Exchange Stabilization Fund, which is controlled by the Treasury Secretary. According to the New York Fed's website, "ESF operations are conducted through the Federal Reserve Bank of New York in its capacity as fiscal agent for the Treasury." As a result, it is easy to see how the Fed could become entangled in questionable Treasury initiatives.
Speaking of such endeavours, at the January 31, 1995, meeting the Federal Reserve's general counsel revealed that the ESF conducted previously undisclosed gold swaps, and, while not spelling out the crucial details, a close reading of the transcript suggests they were recent transactions. Six years later, in an apparent cover-up, that same lawyer would claim not to know of any such dealings. But gold was probably not the only area in which the ESF dealt covertly. According to Greenspan, as of 1995 the Treasury was caught up in not one or a few, but "a lot of different things." While only speculation, it is certainly possible that the Treasury used the ESF for stock market interventions that the central bank deemed unnecessary. If so, the Fed would logically have been concerned that its participation could draw criticism if such a scheme were revealed. Whatever the case, the 1995 FOMC transcripts suggest that the Clinton administration left office having managed to keep politically dangerous revelations from leaking into the public domain.
The Plunge Protection Team article was not the last to hint at the government's resolve to protect the market. In 1998, Crudele described another apparently well-orchestrated leak, this time revolving around the activities of the aforementioned Peter Fisher:
The Federal Reserve [or treasury] is just dying to admit that it has been doing brilliant - but alas, questionable - things to keep the stock market bubble inflated. A Wall Street Journal article on Monday is the closest the Fed has ever come to making this admission, although the newspaper apparently didn't know what it was on to.
The Journal story was about the bailout of the hedge fund, Long-Term Capital Management, and how the Fed stepped in to save the day.60
The story gets interesting in the seventh paragraph, when it starts talking about Peter Fisher, the 42-year-old No. 2 man at the New York Fed, whose "official" job is running the Fed's trading operation. [Remember, Fisher also manages of the Exchange Stabilization Fund (ESF) and foreign custody accounts held at the NY Fed as a member of the US Treasury]
"In that capacity, Mr. Fisher is the Fed's [and treasury's] eyes and ears on the inner workings of stock, bond and currency markets and is given a wide degree of latitude about deciding when certain events pose broader risks," the article says.
"He begins most workdays at 5 a.m. by checking the status of overseas markets... and ends them 11 p.m. the same way. In between, Mr. Fisher SWAPS [Crudele's emphasis] intelligence and rumors with traders and dealers from his office in the Fed's 10th-floor executive suite that overlooks the trading floor he runs," the piece continues.
As I pointed out in a previous column, the market has done some strange things in the wee hours of the morning, especially between 5 a.m. and 7 a.m., which ultimately affect how equities do in the New York market.
Crudele then asked of Fisher:
What exactly does he give to these traders and dealers he talks to at 5 a.m. in the morning? "Swaps," which is the word the Journal reporter came away with, implies a give-and-take. What is Fisher, the second highest person in the New York Fed's hierarchy giving to traders?
Just gossip? Or is Fisher giving away what Wall Street calls inside information.
Whether any actual intervention occurred is not clear. However, the Observer noted weeks later:
Analysts say the Working Group on Financial Markets, nicknamed the "Plunge Protection Team," was extremely successful in helping coordinate a response across the markets when they reopened last Monday.
The team was set up in the late eighties by Ronald Reagan and came into its own in 1998 when it drew up an emergency response in the wake of the collapse of the giant hedge fund, Long Term Capital Management. In the past it has comprised Fed Chairman Alan Greenspan, U.S. Treasury Secretary Paul O'Neill, the heads of the various U.S. stock exchanges and the bosses of a handful of leading investment banks.
However, this time around no fewer than 35 individuals - including representatives of other central banks - are thought to have been in the team.
The challenge was to agree on how to react to the events. Harmony was in danger of being jeopardized when the members representing investment banks clashed with those representing the stock exchanges, who wanted an early resumption to trading. The banks, for their parts, were concerned that staff and infrastructure were too battered to resume in the same week as the attacks.
Eventually the investment banking lobby won the day and when the markets did open on Monday there was an unprecedented level of cooperation between the financial institutions. Short selling seems to have been kept to a minimum as the banks resisted the temptation to bet on the markets plunging. [Emphasis added.]
The significance of all this is difficult to overstate. Nowhere in government statements about the Working Group on Financial Markets or the Washington Post article detailing its activities is mention made of private-sector membership. Although the Working Group is supposed to consult with, among others, "major market participants to determine private sector solutions wherever possible," this is a far cry from the role described by the media reports cited above. They indicate that the banks were not simply consulted about issues, but instead played an integral role in implementing the agenda of the Plunge Protection Team. Along these lines, George Stephanopoulos claimed that the PPT had "kind of an informal agreement among major banks to come in and start to buy stock if there [appeared] to be a problem." So while many people exaggerated the revelations explicitly made in the 1997 Washington Post article, their suspicions were apparently correct after all.
"But Heller's idea was different. He wanted a more direct approach, especially when the bond and currency markets were becoming uncontrollable.... Heller believed that in an emergency, the Fed should start buying stock index futures contracts until it managed to pull stocks out of their nosedive. Essentially, whenever there is heavy buying of these futures contracts it causes the underlying stock market to rise. The futures contracts can be bought cheaply; they are highly leveraged so you can get more bang for your buck, and they eliminate the need for a rigger to purchase, say, all 30 stocks that make up the Dow. Heller explained that the process was simple. And it is. The trouble is, the government never has had authority to rig the stock market." [email from Bill King, March 11, 2003 - email@example.com]
King, who at the time was running several equity trading desks in New York, goes on to say that it was during Q1 of 1990, as the Japan bubble was bursting, that massive S&P; futures buying began to be used extensively by the trusted agents of the PPT, big "name" brokers in New York. During the crises of the late 90's, this ma ssive buying increased even more. By this time, many skeptics of such manipulation in the investment advisory business began to realize it was definitely taking place. [Emphasis added.]
According to Hultberg, King says it was during the first quarter of 1990 "that massive S&P; futures buying began to be used extensively by the trusted agents of the PPT." Along these lines, after September 11, the Observer stated that the PPT had previously acted in the early 1990s. Furthermore, John Crudele wrote in a February 20, 1990, article that "the stock index futures markets were buzzing with rumors that Washington was putting pressure on big trading houses to give the market a lift." This was mere months after Heller's proposal and thus may represent the effective entrenchment of market intervention in U.S government policy. The 1987 and 1989 rescues confirmed by former National Security Council economist Norman Bailey, by contrast, would appear to have been ad hoc activities. These likely were implemented with official approval, but not yet firmly instituted as the government's typical response to a market plunge.
A close comparison between this statement and the remarks of George Stephanopoulos on ABC is revealing. Stephanopoulos said the PPT included the "Federal Reserve, big major banks, representatives of the New York Stock Exchange and the other exchanges." While not mentioning the PPT by name, John Mack reported that a meeting occurred after September 11 and apparently comprised "the firms... the New York Stock Exchange... the Federal Reserve, [and] the SEC." Other than the SEC, the two lists are the same, suggesting that accidental leaks by the former presidential adviser and the CSFB chief executive have essentially confirmed the existence of a PPT that includes the private sector. Furthermore, the list provided by John Mack is exactly identical to one detailed by the Scotsman newspaper, where they claimed that the PPT includes firms as well as "members of the Securities and Exchange Commission, Alan Greenspan's Federal Reserve Bank and NYSE chairman Richard Grasso."
The fact that the publicly acknowledged Working Group and the unspoken PPT differ in their constitutions might explain a report from the U.S. General Accounting Office in 2000. It stated: "Agency officials involved with the Working Group were generally averse to any formalization of the group and said that it functions well as an informal coordinating body." As formalization would no doubt restrict the ability of the Working Group to grant status to the private sector, the reluctance of government officials to do so is not surprising. Instead, the government has apparently used the publicized Working Group as clever cover for the activities of the Plunge Protection Team. This possibility is supported by press reports cited previously in which the Working Group and the PPT are referred to interchangeably.
The dollar's miraculous recovery, apparently thanks to large Wall Street firms, provides a rare glimpse into recent market interventions by the U.S. government. Rather than intervene directly in the markets themselves, the U.S. central bank [acting on treasury's behalf] evidently gave instructions to trusted surrogates who did the Fed's bidding. Importantly, the Fed apparently did not merely provide instructions to each bank separately. Stephanopoulos stated that at the time of LTCM's collapse, "all of the banks got together" to prop up the currency markets." This was clearly a collaborative effort.
The LTCM revelation is also significant because it indicates that the Plunge Protection Team isn't merely concerned with the stability of the stock market. Supporting this, a report cited earlier from the Scotsman newspaper stated that in the aftermath of September 11, the PPT would "also attempt to deflect any pressure on commodity markets."
Taken together, these revelations demand a radical revision of prevailing beliefs about the current state of markets, not to mention the relationship between the private sector and the U.S. government. If major financial institutions are knowingly implementing government policy with regards to important markets, they have essentially become de facto agencies of the state. Just as importantly, the government's role has also changed markedly. Previously content not to intervene in certain spheres, now the Fed and Treasury apparently regard the stabilization of markets to be within their responsibilities.
The continuing silence of government officials about this expanded reach is easily explained. First, they no doubt recognize that an electorate supportive of free markets would frown upon market interventions. More pragmatically though, the government must also realize that to publicly acknowledge such activities would be to invite the greatest of moral hazard situations. To use a famous quote, the risks would be socialized while the rewards would remain privatized. Such a disconnect invites increasingly reckless speculation by investors who believe that the government stands ready to rescue them should crises arise.
Given the available information, we do not believe there can be any doubt that the U.S. government has intervened to support the stock market. Too much credible information exists to deny this. Yet virtually no one ever mentions government intervention publicly, preferring instead to pretend as if such activities have never taken place and never would. It is time that market participants, the media and, most of all, the government, acknowledge what should be blatantly obvious to anyone who reviews the public record on the matter: These markets have been interfered with on numerous occasions. Our primary concern is that what apparently started as a stopgap measure may have morphed into a serious moral hazard situation, with market manipulation an endemic feature of the U.S. stock market.
We have not taken a position on the wisdom of intervention in this paper, largely because exceptional circumstances could argue for it. In many respects, for instance, the apparent rescue after the 1987 crash and the planned intervention in the wake of September 11 were very defensible. Adm inistered in extremely small doses and with the most stringent safeguards and transparency, market stabilization could be justified.
But a policy enacted in secret and knowingly withheld from the body politic has created a huge disconnect between those knowledgeable about such activities and the majority of the public who have no clue whatsoever. There can be no doubt that the firms responsible for implementing government interventions enjoy an enviable position unavailable to other investors. Whether they have been indemnified against potential losses or simply made privy to non-public government policy, the major Wall Street firms evidently responsible for preventing plunges no longer must compete on anywhere near a level playing field. It is most unfair that the immensely powerful have been further ensconced in their perched positions and thus effectively insulated from the competitive market forces ostensibly present in our society.
In addition to creating a privileged class, the manipulation also has little democratic legitimacy in the sense that the citizenry has not given its consent. This has tangible ramifications. By not informing the public, successive U.S. administrations have employed a dangerous policy response that is subject to the worst possible abuse. In this regard, the line between national necessity and political expediency has no doubt been perilously blurred.
We can only urge people to see what the evidence indicates and debate what is and ought to be a very contentious matter. The time for such a public discussion is long overdue.
1) The New York Federal Reserve official in charge of the System Open Market Account has two vital roles which are carried out in his function as a member of the U.S. Treasury. He is responsible for managing the Exchange Stabilization Fund (ESF) and the foreign custody accounts held at the NY Fed.
2) The Fed is a proxy for the treasury. The treasury doesn't have the facilities to conduct open market operations (buying/selling securities) so it uses the Fed's System Open Market Account (SOMA). This misleads people into thinking the Fed is the one responsible for manipulating markets.
3) Wall Street firms may not even know for whom they are buying the futures contracts, as orders coming from the Fed's SOMA can be attributed to foreign custody accounts held at the NY Fed.
4) Interventions apparently started as a stopgap measure which morphed into a serious moral hazard situation, with market manipulation an endemic feature of the U.S. stock market.
5) The two Greenspan quotes which shows how the treasury lead the way towards more market manipulation:
I seriously doubt that, Tom. I am really sensitive to the political system in this society. The dangers politically at this stage and for the foreseeable future are not to the Federal Reserve but to the Treasury. The Treasury, for political reasons, is caught up in a lot of different things.
We have to be careful as to precisely how we get ourselves intertwined with the Treasury; that is a very crucial issue. In recent years I think we have widened the gap or increased the wedge between us and the Treasury.... In other words, we have gone to a market relationship and basically to an arms-length approach where feasible in an effort to make certain that we don't inadvertently get caught up in some of the Treasury initiatives that they want us to get involved in. Most of the time we say "no."
6) At the January 31, 1995, meeting the Federal Reserve's general counsel revealed that the ESF conducted previously undisclosed gold swaps
7) Mr. Fisher (who ran the Fed's SOMA) SWAPED intelligence and rumors with traders and dealers from his office in the Fed.
8) It was during Q1 of 1990, as the Japan bubble was bursting, that massive S&P; futures buying began to be used extensively by the trusted agents of the PPT, big "name" brokers in New York. During the crises of the late 90's, this massive buying increased even more.
9) John Crudele wrote in a February 20, 1990, article that "the stock index futures markets were buzzing with rumors that Washington was putting pressure on big trading houses to give the market a lift." This shows that it is Washington/treasury which drove big trading houses to manipulate the market.
10) Goldman Sachs was used most often as a go-between the treasury and Wall Street.
11) Working Group and the unspoken PPT function as an informal coordinating body which includes the private sector and "manages" US markets.
I will go into everything in more detail tomorrow.